Trade Minister Craig Emerson believes it is important to return the federal budget back to surplus so there's room for the Reserve Bank of Australia (RBA) to cut interest rates again if needed.
The federal government is widely expected this week to release its mid-year budget review, which is expected to contain further spending cuts to make up for lost revenues so that it can still achieve a surplus in 2012/13 as planned.
Treasurer Wayne Swan estimates that $7 billion in capital gains tax revenues have been lost over the next four years because of the negative impact on share prices from the European sovereign debt crisis.
Dr Emerson said it is always important for the government to prune spending when it can.
"What we're seeking to do here is to create room for the other major instrument of macroeconomic policy, which is monetary policy," Dr Emerson told ABC radio on Monday.
"If we are able to create room for the expansion of investment in this country, where there's already a $430 billion pipeline, at the same time easing the pressure on monetary policy, that could create the circumstances of a further reduction in interest rates."
He said lower interest rates are good for homeowners and small business and that this month's cut in interest rates helped to lift confidence and raise forecasts for retail sales in the Christmas period.
He also said that Europe was "not looking too flash".
"It's pretty important that we made the decision so long ago to integrate the Australian economy with the Asian region in what is now the Asian Century," he said.
"That doesn't mean there are no transmission mechanisms from anything that happens in Europe through to the Australian economy, but it certainly puts us in a much better position than just about any other country on earth."
